Its the economy, stupid!!!!
7 January 2013
... Yes, the next election will be all about the economy. Forget all other issues the only one that really counts is the economy.
... Now who was it who said that?.... whoever it was, they were right.
That is why it is all the more baffling that Osborne has taken the 'slow route' back to economic health. OK - we could argue that it is pressure from the LimpDems causing the problem, but Osborne and Cameron should know better and should be educating the Limpdems about what is good for them and the economy.
At the cost of a bit more pain now an awful lot of long and extended future pain would be alleviated. If they acted immediately in 2010 with faster and deeper public spending cuts combined with tax reductions and a range of supply side reforms it would have had time to bear fruit before the next election, even with the international dimension holding things back.
But now it is too late for such bold measures to really pay off before the general election. Osborne has set a course and he must hope that the economic recovery has sufficient momentum by 2015 to have an electoral impact. That does not excuse him though - more should still be done to lift the burden on the private sector and help that recovery.
2013, despite set-backs along the way, should see those first green shoots become more visible. There remain considerable dangers though from the Eurozone and the USA that could hold us back and even cause a temporary reversal of recovery, simply because it is so fragile. That is why more growth measures are needed through supply-side reforms, tax cuts and public spending cuts. Then we get to the payback for QE - inflation is a threat that cannot be ignored and higher interest rates will be needed as the economy recovers.....
Challenging times ahead
- Indeed - it was Bill Clinton, he who opened up credit to the uncreditworthy leading to the banking crisis...... and Lehman's collapse.
- The uncreditworthy* being banks and other financial institutions that fell for their own schpeel and sought to derive gains, again and again, from debt-bundles.
How did things go under G Bush sr.? He who had "Read my lips, NO more taxes" as his schpeel?
*
[BTW. My spell checker must come from that bygone era, as it likes 'creditworthy' but not the 'un-' prefix, funny old world?] - The bundling and trading of debt is a perfectly valid and reasonable practise provided it is correctly rated for risk. Indeed many people depend on such assets for income as part of diversified portfolios - I recommend the best professionally managed debt funds myself regularly.
We had a problem of criminal fraud taking place in the USA in which the true nature of 'toxic debt' was hidden. That toxic debt to a larger extent was due to the Clinton reforms. - So that would be deregulation and soft-touch supervision?
One man's diversified portfolio is another man's cardboard duvet. If it wasn't for the poor the rich would have to work all the harder.
Still...wherever you have limitless remuneration tied to occult prognostication, prestidigitation is never far away. More David Nixon than Richard M Nixon. - Tom - a lot of words without saying anything at all about a subject you clearly know nothing about.
- Were there is a Wiki, there is a way...
"Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation (CMOs), to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).
Critics have suggested that the complexity inherent in securitization can limit investors' ability to monitor risk, and that competitive securitization markets with multiple securitizers may be particularly prone to sharp declines in underwriting standards. Private, competitive mortgage securitization is believed to have played an important role in the U.S. subprime mortgage crisis.
In addition, off-balance sheet treatment for securitizations coupled with guarantees from the issuer can hide the extent of leverage of the securitizing firm, thereby facilitating risky capital structures and leading to an under-pricing of credit risk. Off-balance sheet securitizations are believed to have played a large role in the high leverage level of U.S. financial institutions before the financial crisis, and the need for bailouts.
The granularity of pools of securitized assets is a mitigant to the credit risk of individual borrowers. Unlike general corporate debt, the credit quality of securitised debt is non-stationary due to changes in volatility that are time- and structure-dependent. If the transaction is properly structured and the pool performs as expected, the credit risk of all tranches of structured debt improves; if improperly structured, the affected tranches may experience dramatic credit deterioration and loss.
Securitization has evolved from its tentative beginnings in the late 1970s to an estimated outstanding of $10.24 trillion in the United States and $2.25 trillion in Europe as of the 2nd quarter of 2008. In 2007, ABS issuance amounted to $3.455 trillion in the US and $652 billion in Europe...
...Risks to investors
Liquidity risk
Credit/default: Default risk is generally accepted as a borrower’s inability to meet interest payment obligations on time. For ABS, default may occur when maintenance obligations on the underlying collateral are not sufficiently met as detailed in its prospectus. A key indicator of a particular security’s default risk is its credit rating. Different tranches within the ABS are rated differently, with senior classes of most issues receiving the highest rating, and subordinated classes receiving correspondingly lower credit ratings. Almost all mortgages, including reverse mortgages, and student loans, are now insured by the government, meaning that taxpayers are on the hook for any of these loans that go bad even if the asset is massively over-inflated. In other words, there are no limits or curbs on over-spending, or the liabilities to taxpayers.
However, the credit crisis of 2007–2008 has exposed a potential flaw in the securitization process – loan originators retain no residual risk for the loans they make, but collect substantial fees on loan issuance and securitization, which doesn't encourage improvement of underwriting standards.
Event risk
Prepayment/reinvestment/early amortization: The majority of revolving ABS are subject to some degree of early amortization risk. The risk stems from specific early amortization events or payout events that cause the security to be paid off prematurely. Typically, payout events include insufficient payments from the underlying borrowers, insufficient excess spread, a rise in the default rate on the underlying loans above a specified level, a decrease in credit enhancements below a specific level, and bankruptcy on the part of the sponsor or servicer.
Currency interest rate fluctuations: Like all fixed income securities, the prices of fixed rate ABS move in response to changes in interest rates. Fluctuations in interest rates affect floating rate ABS prices less than fixed rate securities, as the index against which the ABS rate adjusts will reflect interest rate changes in the economy. Furthermore, interest rate changes may affect the prepayment rates on underlying loans that back some types of ABS, which can affect yields. Home equity loans tend to be the most sensitive to changes in interest rates, while auto loans, student loans, and credit cards are generally less sensitive to interest rates.
Contractual agreements
Moral hazard: Investors usually rely on the deal manager to price the securitizations’ underlying assets. If the manager earns fees based on performance, there may be a temptation to mark up the prices of the portfolio assets. Conflicts of interest can also arise with senior note holders when the manager has a claim on the deal's excess spread.
Servicer risk: The transfer or collection of payments may be delayed or reduced if the servicer becomes insolvent. This risk is mitigated by having a backup servicer involved in the transaction.
Recent lawsuits
Recently there have been several lawsuits attributable to the rating of securitizations by the three leading rating agencies. In July, 2009, the USA’s largest public pension fund has filed suit in California state court in connection with $1 billion in losses that it says were caused by “wildly inaccurate” credit ratings from the three leading ratings agencies." - I have been saying for over 20 years that the rating agencies are corruptible, ever since Drexel Burnham Lambert and BCCI in 1991/2. I saw BCCI coming but a portfolio I ran at the time lost $50 million on Adams County muni bonds and First Executive ABS securities, which went from AAA to dust overnight.
http://news.ycombinator.com/item?id=2768707 - This was the first big ABS collapse: http://money.cnn.com/magazines/fortune/fortune_archive/1991/05/20/75024/index.htm
"It's the economy stupid!" Was said by the same man who repealed a certain act to do with banking regulation.
Thanks for the bill, Bill.